Where gold prices are headed by the end of 2011?

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With only three weeks left until the end of 2011, investors, traders and market analysts are not certain on up to what level gold prices will reach. The answer to the question is one of the most sought-after predictions, and those who can guess it right will be able to make fortunes during the next three weeks.

Gold prices are usually influenced by many factors . In 2010, investors were buying gold as a hedge against financial disaster in the Eurozone, as some EU countries teetered on the brink of default. The response by most governments was to print money. As paper currencies declined in value, the price of the yellow metal rose.

During the past decade, gold prices jumped 400% and made a record-breaking run in 2010, rising 26%, hitting an intraday high of $1,637.50 an ounce.

So far, 2011 has been dicey for gold, with prices getting smacked with double-digit selloffs and rallies. Civil unrests that exploded throughout the North Africa and parts of the Middle East and Japan contended with its worst triple disaster drove gold prices higher since March.

As of now, the threat of new downgrades and slowing global growth remains, without clear near time solutions on or under the table. The gold price will very much likely not get rest from volatility.

Some analysts are predicting a deep correction ahead of gold prices. A 20% to 40% selloff in all assets in the case of a default could be an option for traders.

The biggest longterm headwind for gold prices is rising interest rates. The U.S. Government will most likely not raise interest rates until the end of December 2011.

The European Central Bank and China have been fairly aggressive with tightening monetary policy in 2011 and more rate hikes are expected. If real interest rates turn positive, the main reason for holding gold, because it holds more value than paper currencies, could disappear.

For now market players and research analysts alike think the tide won’t turn against gold anytime soon. After the Eurozone summit of last week, politicians are still busy to sort out their differences, to fix their internal political issues and rapidly growing civil unrest across the world.

Goldman Sachs Group Inc. cut its forecast for commodity gains in the next 12 months to 15 percent from 20 percent in a report last month.  JPMorgan Chase raised its gold price forecast for the fourth quarter to $1,800 an ounce, while Deutsche Bank says gold is on track to challenge $1,653.50 an ounce. JPMorgan, which now accepts gold as collateral, cites seasonality, that is strong physical buying from India in the fall, and rising debt levels as the two catalysts for record gold.

The World Gold Council had estimated that Chinese imports could surge to 400 tons by the end of  the year.

A weaker dollar and lack of trust in paper currencies would very much likely continue to generate sustained demand for gold bullion. But today, the strong US dollar drove the yellow metals price nearly 3% lower.

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